Bitcoin as loan collateral: why banks are now turning to crypto-lending

Bitcoin has long been more than just a speculative investment: the digital gold is also increasingly being used as “collateral” for traditional bank loans - a concept that is currently gaining momentum worldwide under the term Bitcoin-backed lending. For banks, this opens up a logical extension of their crypto offering: after custody and trading, they can now also offer their customers liquidity based on existing Bitcoin holdings without them having to sell their coins. In the following interview, Thomas Münch, Deputy Head of Mortgage & Construction Financing, explains why the model is attractive for both sides, what role regulation and technology play and what a bank-compatible solution looks like.

What is Bitcoin-backed lending and can it usher in the next stage of development after custody and trading?

Bitcoin-backed lending describes lending in which Bitcoin is deposited as collateral in order to receive a loan in conventional currency or in digital, stable currencies (so-called stablecoins) in return. This is particularly exciting for many investors because they do not have to sell their Bitcoin and can still create liquidity.

For banks, this is a logical extension of their crypto service portfolio: After safekeeping (also known as custody) and trading cryptocurrencies, lending is now the next step in active banking. Basically, the classic lombard principle - i.e. lending against deposited assets - is transferred to a digital asset. The difference is that Bitcoin can be traded worldwide around the clock and is highly liquid, meaning it can be exchanged for money quickly and easily.

This development not only opens up a new, attractive source of income for banks - for example through interest income or additional products for existing customers - but also responds to a growing demand: many crypto holders want to “put their digital assets to work” instead of just holding them passively. Increasing regulation at European and national level is also creating legal clarity - an important aspect for banks operating in a highly regulated environment.

In short: Bitcoin-backed lending combines the traditional strengths of a bank - such as trust, legal security and customer relationships - with the advantages of digital assets - including high availability, global acceptance and modern technology.

For example, what makes Bitcoin so attractive as loan collateral - for customers and for banks?

From the customer's point of view, the biggest advantage lies in gaining liquidity without having to sell the Bitcoin. This can not only be advantageous from a tax perspective, but also enables further participation in possible price increases. Long-term investors in particular use Bitcoin-backed loans to strategically deploy their assets without having to liquidate them.

Bitcoin is a particularly suitable collateral asset for banks: it is standardized, can be fully represented digitally, can be traded around the clock and is very liquid. Thanks to the possibility of real-time valuation, the collateral can be managed efficiently and a rapid response is possible in the event of strong market movements - which reduces the risk of payment defaults.

The model is therefore a real win-win situation: customers receive flexible financing options, banks benefit from new sources of income and a modern product that combines the traditional and digital worlds of finance.

Why is crypto lending a strategic growth market today and no longer a niche?

We are seeing a significant increase in demand - especially from younger, digitally savvy customers and wealthy private individuals, who now often hold a significant portion of their portfolio in cryptocurrencies. These target groups expect solutions that enable trading, custody and financing from a single source.

At the same time, more and more banks are recognizing the economic potential: they do not want to lose their customers to specialized FinTechs and see lending against digital collateral as an opportunity to tap into additional - often particularly profitable - sources of income. Initial pilot projects in Switzerland, Germany and the USA show that the model works and is ready for the market.

In addition, the regulatory framework is becoming clearer - for example through the European MiCAR regulation (Markets in Crypto-Assets Regulation) or national guidelines. At the same time, modern technical platforms make it easy to integrate such offerings, for example via so-called white label solutions in which banks use ready-made, customizable software.

Crypto lending is therefore no longer a niche topic, but is developing into a strategic addition to traditional banking services.

What does a bank-compatible solution look like that overcomes the previous weaknesses of centralized financial service providers in the crypto sector?

The most important thing is a fully regulated setup - i.e. an offering that is operated under an official banking license, an e-money license or a custody license. This includes clear processes for verifying the identity of customers, preventing money laundering and defined risk and capital requirements. Trust can only be built under such conditions.

A secure custody model - for example via separately managed wallets, so-called segregated wallets, with a licensed provider - ensures that customers remain the owners of their Bitcoin, while the bank has access to the collateral. This fiduciary model is both transparent and legally robust.

Technologically, it requires an integrated solution that allows real-time valuations, triggers automatic collateral requests and is fully connected to the core banking system. Modern cloud platforms or white label providers already make such technical setups possible today.

It is also important to have a clear and transparent price structure - for example with regard to the lending limit (i.e. the proportion of the Bitcoin value that you receive as a loan) - and to avoid non-transparent promises of returns. Bitcoin-supported loans can thus become a secure, efficient and sustainable part of the regular banking offering.

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